fin 30220: macroeconomic analysis measuring the u.s. economy
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FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy
U.S. GDP of $17 Trillion represents approximately one fifth of total worldwide production ($85 Trillion) and makes the United States the largest single country economy on the planet!!* Source: CIA FactbookNote: 20013 GDP estimates measured on a Purchasing Power Parity Basis
GDP is the standard benchmark for economic well being. Is it a good indicator of well being?VS1950: $275B2010: $14,600B1950: $1,696B2010: $12,973B1950: $10,9412010: $42,1201950: $20,0002010: $50,233Principle #1: What exactly are you trying to measure? Is your definition consistent with what you are trying to measure? Ratio2005 Dollars2008 Dollars2005 Dollars
Real Per Capita GDP11250384913.4214222222
Real Median Household Income15000270001.8
GDP is the standard benchmark for economic well beingVSAnnual defense spending has grown from $35B in 1950 to $795B in 2009. Should this be subtracted out?The service industry has grown from 30M employees in 1950 to 113M in 2009. Is this really new activity?Should we count things like pollution as economic bads? How do we account for the added quality and convenience of new products and technologies?
The Genuine Progress indicator corrects for social badsVS
Gross Domestic Product measures the current market value of all goods and services produced within a countrys borders over a certain time period (usually a quarter)Farmer A produces 1,000 bushels of Apples (Apples cost $10/bushel)Farmer B produces 2,000 bushels of Corn (Corn costs $15/bushel)GDP = ($10)(1,000) + ($15)(2,000) = $40,000Principle #2: How is your variable measured?
Suppose that Intel produces 1,000 computer chips (P = $100)100 Chips sold to consumers900 Chips sold to DellDell produces 500 computers (P = $1,000)$100,000$500,000- $90,000$40,000 - $0$100,000$450,000SalesMaterials ExpensesMaterials ExpensesSalesChange in InventoriesTotal = $550,000Value Added Approach(The remaining 400 chips were added to Dells inventories)
Example: MicrosoftSales: $600,000Expenses: $420,000Labor Costs: $200,000R&D Costs: $50,000Materials: $100,000Lease: $20,000Utilities: $10,000Equipment Purchase: $40,000Inventories:BOY: $620,000EOY: $640,000 Value Added:
$600,000 - $220,000 (Non-Labor Exp)+ $40,000 (Equipment Inv)+ $20,000 (Inv. Investment)+ $50,000 (R&D) NEW $490,000
Product MarketsFactor MarketsFactor ServicesGoods & Services (GDP)IncomeExpenditures
The Circular Flow of Payments suggests that we could also calculate GDP by measuring total expenditures on the goods and services producedGDPGross Business InvestmentStructuresEquipmentInventoriesResidential InvestmentConsumer ExpendituresDurablesNon-DurablesServicesGovernment Purchases (Federal, State, and Local)
Suppose that Intel produces 1,000 computer chips (P = $100)100 Chips sold to consumers900 Chips sold to Dell$0$40,000Inventory InvestmentTotal = $550,000Expenditure Approach$510,000Consumer DurablesDell produces 500 computers (P = $1,000)(The remaining 400 chips were added to Dells inventories)
Whats so Gross about GDP?Suppose that we have the following information from GMs financial statementsSales: $300MDepreciation: $5MChange in Inventories: $20MMaterials Costs: $150M$300,000- $150,000$20,000Materials Expenses (000s)Sales (000s)Change in Inventories (000s)Total = $170,000Strictly speaking, depreciation should be counted as a cost of production. GDP calculations do not include depreciation expenses!
Exports of Goods and Services US Citizens Working AbroadImports of Goods and ServicesForeign Citizens Working in the USUS Acquisition of Foreign AssetsForeign Acquisition of US Assets
BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thailand. How should we count this production?$130,000- $70,000Labor Costs (000s)Value Added (000s)$400,000- $50,000Labor Costs (000s) Value Added (000s)$60,000Profits (000s)$350,000Profits (000s)Gross Domestic Product = Total Production within US bordersGross National Product = Total Production by US CitizensThe $60,000 in profits from BMW accrue to foreign nationals and should not be counted in US GNP. However, GNP would need to include the profits from Nikes Thailand plants.
BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thailand. How should we count this production?$130,000- $70,000Labor Costs (000s)Value Added (000s)$400,000- $50,000Labor Costs (000s) Value Added (000s)$60,000Profits (000s)$350,000Profits (000s)GDP = $130,000GNP = $70,000 + $350,000 = $420,000$420,000 = $130,000 +($350,000 - $60,000)GNPGDPNet Factor Payments
With the global economy, we need to keep track of expenditures between the US and the rest of the world as well as domestic expendituresGDPGross InvestmentConsumer ExpendituresGovernment PurchasesNet Exports = Exports - Imports
GDP is calculated using a method of double entry accounting each dollar of production should have a corresponding expenditure. GDP: 2014Q1
CategoryAmount (B)% of Total Consumption$11,79269%Gross Investment$2,69416%Government$3,11618%Net Exports-$501-3%GDP$17,101100%
Recall that total income (national income) in the US should accrue from the production undertaken by American citizensGross Domestic Product = $17,101BFirst, we need to correct for income earned abroad as well as domestic production accruing to foreign nationals+ Net Factor Payments = $235BGross National Product = $17,336BNow, recall that depreciation is an expense that should be deducted as a production cost- Depreciation Expense = $2,721BNet National Product = $14,615BFinally, we need to correct for indirect taxes/transfers (essentially, sales taxes)- Indirect Taxes = $198BNational Income = $14,417B
National Income by Source: 2014Q1
CategoryAmount(B)% of TotalWages$9,04062%Proprietors Income$1,3669%Rental Income$6114%Income on Assets$2,03014%Transfer receipts$2,50417% Less Contributions- $1,1346%National Income$14,417100%
To get to the flow of funds accounts, begin with GDP equals aggregate expendituresNow, add net factor payments to both sidesCurrent Account = NX + NFPLastly subtract depreciation and indirect taxes from both sidesNet Investment (Gross Investment minus depreciation)National IncomeConsumer Outlays (Net of Indirect Taxes)
National Income = Personal Income + Undistributed Corporate ProfitsNow, Subtract Consumption from both sidesSubtract taxes from both sides.The flow of funds measures financial market transactionsNet Private Saving = Personal Saving + Undistributed Profits
Last year, the US current account was -$380B. What does this mean?Total US IncomeTotal US OutlaysNet lending abroadIn other words, the US is borrowing $1B per day from abroad! Should we be worried about this?This number continues to shrink as US consumers overspend!!This number continues to grow as the US government overspends!!!
Think of the current account as the savings of the entire economy. We have become a debtor nation!Billions of Dollars